CM in MA's Comments

Any talk of a V-shaped recovery is poppycock, Bob Rodriguez of First Pacific Advisors says, warning the bulk of U.S. credit problems are still to come. By the close of 2011, Treasury debt outstanding will be $14.6-16.6T, and debt-to-GDP ratio will rise to between 97-110%, which leads him to wonder: "How do we finance all this debt?"

Wed, 03 Jun 2009 19:52:44 -0400

I wish I could give your comment more than one thumbs up! Priceless!

On Jun 03 06:18 PM Missing_Link wrote:

> We could have a bake sale.

All You Need to Know about the First-Time Homebuyer Tax Credit

Fri, 22 May 2009 08:39:05 -0400

I have one more question. I met the definition of a first time buyer in 2003. After 20 years on active duty in the U.S. military, I put down more than 20% on my home purchase, took out a conventional fixed-rate mortgage, and now pre-pay my principal. My question is: where's my tax credit or loan modification? Oh, and who is paying to provide the $8000 credit? Sorry, that makes two questions.

Market Timing Buries 'Buy and Hold' in Asset Allocation

Fri, 15 May 2009 07:56:50 -0400

Dr. K,

Thank you for the replies to my questions. I appreciate the time you took to provide the extensive answers.

CM

On May 14 07:31 PM Dr. Kris wrote:

> To CM in MA:
>
> Thanks for your insightful comments. Here's a response to the points
> you brought up:
>
> - Were transaction costs and taxes taken into account when calculating
> the returns?
>
> No. These are, of course, different for everyone. Within a mutual
> fund family the occasional movement in and out of an asset class
> can be done without charge. As to taxes, if you are holding your
> investments in an IRA there are none. Outside of an IRA you will
> be paying taxes on realized gains at a rate that depends on many
> things but that is still preferable to loss of principal. Taxes must
> be paid sometime. It's one of the two things you can be certain about.
>
>
> BTW, the SMC Analyzer does have the capability of adding these parameters
> along with others such as margin costs and account interest.

>
> - What is meant by the "averaging period is re-optimized every month?"
>
>
> This refers to the portfolio growth graph which is essentially a
> backtest of following the market timing versus the buy and hold strategies
> each month and then reaping the results of following the recommendations.
> Every month with the addition of new data the averaging period of
> the CCI for each asset class is re-optimized to maximize the effectiveness
> of its use in terms of portfolio growth.
>
> - Does it worry you that two assets with the following monthly Hi-Low-Close
> data (55, 45, 50; 100, 20, 30) yield the same "typical price" input
> into the CCI calculation? If these assets then had following months
> of (50, 40, 45; 70, 25, 40), the "typical prices" would again be
> the same for that month. Carry this on long enough and the deviations
> from the moving averages also become the same. Likely, perhaps not.
> But it raises the possibility that a very volatile asset can masquerade
> as a far less volatile asset. Would this affect your strategy?

>
> First of all, we are using asset classes here composed of many individual
> components hence the volatility intra-month should theoretically
> be dampened. Nevertheless, the analyzer uses only closing prices
> as a substitute for typical price. You do bring up an important point
> however. That sampling the performance of an asset class only at
> periodic intervals has a nonzero probability of misunderstanding
> its true characteristics. With 80+ years of monthly data available
> however there is a high confidence that the volatility of the asset
> classes used in the analysis is properly represented.
>

Following in Goldman Sachs's (GS) footsteps, Merrill Lynch muzzles a blogger - our very own Tyler Durden. Here's the take-down letter.

Thu, 14 May 2009 13:28:50 -0400

Tyler, those who have fought for freedom, and the many who've died doing so, would hold you in high esteem. Thank you for not wasting your right to freedom of speech.

FDA slaps General Mills (GIS) with a warning, saying heart benefit claims in use on Cheerios boxes for over 2 years represent 'serious violations' of federal law. The FDA suggests filing a new-drug application for Cheerios to keep the box label as is.

Wed, 13 May 2009 13:22:13 -0400

lmfao. Ufb. Snafu. Ayfkmow?

After sinking to $1.00, buyers step in to snap up shares of GM (GM), now +16% to $1.33. Reminder: Citigroup (C) bounced off $1 back in March and never looked back.

Wed, 13 May 2009 12:36:51 -0400

In March, Citi insiders were buying ahead of Pandit's comments about the Jan-Feb period. Yesterday, GM insiders were selling. Zero on the stock seems like a done deal no matter what. I guess some daytraders can have fun with GM for a few weeks.

Market Timing Buries 'Buy and Hold' in Asset Allocation

Wed, 13 May 2009 09:22:09 -0400

Dr. Kris, thanks for the interesting article. I do have a few questions, though.

- Were transaction costs and taxes taken into account when calculating the returns?

- What is meant by the "averaging period is re-optimized every month?"

- Does it worry you that two assets with the following monthly Hi-Low-Close data (55, 45, 50; 100, 20, 30) yield the same "typical price" input into the CCI calculation? If these assets then had following months of (50, 40, 45; 70, 25, 40), the "typical prices" would again be the same for that month. Carry this on long enough and the deviations from the moving averages also become the same. Likely, perhaps not. But it raises the possibility that a very volatile asset can masquerade as a far less volatile asset. Would this affect your strategy?

Thanks!

The proposed clamp-down on the credit-card industry's most unsavory practices, being taken up in Senate this week, fails to adequately address perhaps the biggest problem of all: the systemic exploitation of the human psyche.

Tue, 12 May 2009 14:30:11 -0400

Whippett, amen! My card company forces me to take cash back. Like you, I've always carried a zero balance. Discounted prices and deferred payment. All I have to bring to the table is personal responsibility and discipline. It's a terrible deal! Thank goodness the government is here to save us all!

The proposed clamp-down on the credit-card industry's most unsavory practices, being taken up in Senate this week, fails to adequately address perhaps the biggest problem of all: the systemic exploitation of the human psyche.

Tue, 12 May 2009 13:51:18 -0400

The program to turn Americans into wards of the state continues, aided and abetted by ourselves.

Buried in Chrysler's bankruptcy filing is news that the company won't repay more than $7B of taxpayer-funded bailout money.

Wed, 06 May 2009 09:58:29 -0400

It's not as if the government was going to send me, and every other person in the U.S., our approximately $23 (per person) back. For me, it was already gone before they gave it to Nardelli & Co.

But anyone who votes for either a Republican or Democrat can't complain about these events. And please don't tell me that voting for a third party is a wasted vote. The wasted votes are those cast for the two major parties who don't give a damn about anything but their own interests. I encourage one and all to speak loudly in the voting booth where it can make a difference. All the wailing and gnashing of teeth on comment boards makes no difference whatsoever.

Be a patriot. Be patriotic. Vote for a third party.

The SEC Decides to Figure Out How Scams Work

Wed, 29 Apr 2009 12:47:53 -0400

If the old saying is true, then there are 60 suckers born every hour and 525,600 suckers born every year. Given that many suckers, there is likely no shortage of con artists to sheer them. The number of permutations to those cons will easily overwhelm any efforts, best or otherwise, by a government bureaucracy. Those looking to the government to protect them from themselves will be disappointed.

How libertarian dogma led the Fed astray: "The Fed's increasingly libertarian philosophy underpinned its view that it could not know how to recognise a credit bubble but knew what to do once a bubble burst."

Wed, 29 Apr 2009 11:48:40 -0400

Mr. Kaufman has created quite a strawman. Libertarianism is not practiced by either of the major political parties in the U.S. Libertarianism was not practiced, nor likely understood, by those operating the banks and other financial institutions. Libertarianism is not a concept that drives the individual actions of marginal borrowers and the lenders who service them. To whatever extent the Fed espoused and acted on libertarian principles (and that point is highly debatable), the Fed cannot be held responsible for the outcomes caused by the selfish actions of others. Mr. Kaufman would do well to understand libertarianism before he blames today's economic woes on a philosophy that, unfortunately, has few adherents and, sadly, fewer still practitioners.

Three great reads for lunchtime: 1) The IMF and the panic of 2008 2) The trouble with the 'millionaire tax' 3) Led astray by libertarianism

Tue, 28 Apr 2009 13:37:46 -0400

Mr. Kaufman has created quite the strawman to destroy. Libertarianism is not practiced by either of the major political parties in the U.S. Libertarianism was not practiced, nor likely understood, by those operating the banks and other financial institutions. Libertarianism is not a concept that drives the individual actions of marginal borrowers and the lenders who service them. To whatever extent the Fed espoused and acted on libertarian principles (and that point is highly debatable), the Fed cannot be held responsible for the outcomes caused by the selfish actions of others. Mr. Kaufman would do well to understand libertarianism before he blames today's economic woes on a philosophy that, unfortunately, has few adherents and, sadly, fewer still practitioners.

Tim Geithner Pulls an Amy Poehler

Wed, 22 Apr 2009 08:29:09 -0400

Except that Amy Poehler is funny.

Nucor Forges a Different Path

Tue, 14 Apr 2009 10:23:27 -0400

I, too, am long NUE. I've owned shares for more than a decade. As you outlined NUE is a great company, with terrific employees and outstanding management. They are leaders in new steel technology. They use cash wisely. When I listen to their conference calls, I come away believing that the folks running the firm know what they are doing and that they are being straightforward with shareholders and analysts. Compare all this with the financial companies. The difference is stark. Thanks for the article, it's refreshing to see the good in American business get some pixels.

U.S. Government's Plan for Banks - Ready, Fire, Aim

Thu, 09 Apr 2009 13:56:24 -0400

Timmy G knows precisely what he's doing and is being quite transparent about it. Obfuscation is the desired result. Reality becomes what the government says it is. Pretty simple, really. Success (or victory) can be declared based on yet to be defined outcomes. Enough loopholes will exist for anything to be explained away. This surprises anyone? Here's some free advice regarding portfolio construction and bank stocks: buy something else!

I'll side with Warren Buffett on this one, if I can't understand it I won't buy it. And I can't understand banks, that's for sure. Throw in a Dirty Harry approach (that one must know their limitations), and bank stocks become radioactive for me. I guess I won't be able to brag about how I scored on C, BAC, WFC, etc. But at least I might be able to buy myself a six-pack to enjoy.

Good luck, and good hunting!

Idiotic Online Brokerage of the Day, April Fool Edition

Mon, 06 Apr 2009 12:27:34 -0400

C'mon, Felix. The first action to be taken by anyone who sees an error in their accounts, be it $1 or $1M, is to contact the holder of the account to report the error. Doesn't matter if it's April Fool's Day or Christmas. Enough is enough with allowing the mistake, stupid or otherwise, on the part of one party to explain, justify, or excuse the following mistake of another. Sure, sanction Zecco. Then sanction the boneheads who traded money they knew they didn't have. That's fraud, too. The logic train in this column is the same that perpetrates the notion that those who borrowed money they knew they could never pay back are innocent victims. It's the same logic that perpetrates the notion that those who loaned money to those they knew couldn't pay it back are innocent victims. It's the same logic that seems to permeate our society today, namely that there is no responsibility for any action. Sorry, no sale.

Alarm Bells at IBM?

Mon, 16 Mar 2009 09:17:29 -0400

Debt/equity without taking into account the 738 million treasury shares distorts the ratio. Total debt to equity is closer to .4 after the correction. Looking at total liabilities (including pension) raises the ratio to 1.17; not great, but not horrible either. Certainly not bad enough to warrant the negative tone of the article.

Cash flow at IBM is anything but a problem. The problem is what to do with cash. The company could pay off their entire debt with two years of cash flow. Add back depreciation and it would take even less time.

Expect IBM to continue making acquisitions, buying back shares and increasing the dividend. Why would anyone want to short that.

Disclosure: Long time (close to 20 years) long of IBM.

Attending Media Giant Disney's Annual Shareholder Meeting

Thu, 12 Mar 2009 08:20:38 -0400

Matthew, thanks for the report from DIS's annual meeting. Like you, I own an insignificant number of shares. The first-hand coverage of the meeting was interesting and informative. Thanks again.

TARP Accountability: Bankers Say 'What, Me Sorry?'

Wed, 11 Feb 2009 09:58:26 -0500

TARP means you never have to say you're sorry. Ought to be set to music.

Some Misconceptions About the Great Depression

Wed, 11 Feb 2009 09:23:25 -0500

Tim, thank you for a very good article. There are, at least, two major themes prominent in the coverage of today's financial situation. The first is the "now vs the Great Depression" with various comparisons of how the current period is either less worse, equally worse or worse than the 1930s. The second, which assumes the worse than case, is that the present is a situation unprecedented in our nation's financial history. These comparisons are often used to "prove" that a certain prescription is the best course of action.

There are two assumptions made when looking to the past for policy prescriptions. One assumption is that the past and present situations can be accurately assessed for both similarities and differences. Listening to the speeches and presentations by bank executives, government officials, economists, etc, can we say that we accurately understand our present situation? If not, are we any better at assessing the situation of the 1930s when our views are affected by hindsight bias? The second assumption is that policy actions cause the subsequent effects. Can solutions to complex economic situations be put down to the effects of one variable? Is it increased government spending, or spending (increased or otherwise) in certain sectors? It gets complicated pretty quickly.

Will increased government spending bring about an economic recovery? Perhaps it will. It is also possible that increased government spending will be but coincident to normal economic crests and troughs. Kasriel's charts and text seem to make this very point when it is emphasized that government spending did not make up all of the GDP growth from 1934-37. So to jump from there to his conclusion that "monetized increased federal government spending does result in increased real economic activity in the short run" seems a giant leap of logic.

Measure, Don't Model: The Forest and the Trees

Fri, 09 Jan 2009 19:22:10 -0500

Don,

I'm one ahead of you. I have a cold one in hand. And, I agree, the thread is probably getting boring for others. I'd ask the same of you regarding inflammatory comments. You're accusing me of some things I haven't done. We could go back and forth, but what's the point. C'mon, Don, give me a smile. It's Friday. ;-)

We started with a difference on drift. And we do agree on many things. Like you, I don't intend to give away all my secrets. I'm a big fan of Taleb's writings, but there's a subtle hole in his work. I suspect he knows it, but I'm not sure he'd sell as many books if he acknowledged it. The funny thing is that he rails against means and standard deviations, and yet thinking in means and standard deviations is exactly what causes it. My spreadsheet tools which did more or less exactly what I think you're doing contained this same hole. Perhaps you've already realized it. Here's a hint, and keep the normal probability vs actual probability methodology in mind: take a mean and standard deviation for returns of any time period. Now consider what just happened to volatility. Now consider the observation, which Taleb, Mandelbrot, you and I (we're in good company!) still make that there are far too many 4th, 5th, and 6th standard deviation moves. It hit me one day while I was mowing the lawn. I threw out a lot of spreadsheets. Now, you may draw a wrong conclusion about my thinking from the way that's written. I'm not saying that there aren't many more large moves than there ought to be under a normal distribution. I'll leave it at that. Cheers!

Measure, Don't Model: The Forest and the Trees

Fri, 09 Jan 2009 14:12:10 -0500

Don,

I'm not trying to incite. More on that below.

Ok, my point about the measurements was that if one is going to go to the trouble of measuring, then take the trouble to measure accurately. That was all. Remember, I wasn't disagreeing with your observation.

I was clear what was cherry-picked. The time period you selected when discussing forests and trees.

The bell curve, along with means and standard deviations, is bunk when it comes to market returns. But if standard deviations are going to be employed, then there has to be a mean to go with. This is our drift disagreement. There's a data set with a standard deviation of four units. What information does that convey? Nothing. Without an associated mean, the standard deviation has no context. Again, it's all useless, but I was getting at accuracy and consistency. This is all about being precisely wrong :-)

We'll agree to disagree about widely accepted. I figure that if I'm aware of something, and there are a whole lot of people smarter than me, then they probably know about it too. :-)

In any of my comments, I was never trying to incite. Folks need to remember that e-mails and comments, unless it's pretty explicitly laid out, have no tone other than that provided by the reader. This is an ineffective way to communicate because so much of what is transmitted by tone and body language is lost. In my view, that's why comment streams seem to degrade into back and forth attacks.

I said it might set you off because on two previous occasions you indicated my comments did annoy you. I'm really and sincerely sorry about that. The error in your probablistic thinking, my view only, is illustrated by your example in the comment stream about the biotech stock combined with the tools you're providing (I've looked at them). I touched on it when I mentioned the price movements of financials in 2008 in one of my comments. Betting on stagnation (picking up nickels near the mean) works until the day stagnation abruptly and without warning leaves (steamrolled in the fat tails); apologies for cribbing Taleb. The event path used for "actual probabilities" (correct me if that's not the price history) is only one of an infinite number of paths the price could have taken, and it is by definition incomplete. Likewise, there is an infinite number of paths the stock price can take in the future. Using tools based on variance, in a world of infinite variance, is very dangerous. Just to be upfront, I've gone down the very path you are on, or at least pretty darn close to it. We've used similar tools and calculations but, I think, looked at the output in different ways. It is compelling and tantalizing. That is why I read your original article. I truly wish you luck and good fortune along the way.

Measure, Don't Model: The Forest and the Trees

Fri, 09 Jan 2009 12:05:10 -0500

Sorry for the typos in my last comment: 1) "you're" not "your" 2) "again" not "again" and 3) "associated" not "associate"

Measure, Don't Model: The Forest and the Trees

Fri, 09 Jan 2009 12:00:09 -0500

Don,

Easy fella. C'mon, you write that folks are not seeing forest for trees, but then get uptight when they write your falling into the same trap. What's good for the goose, pal. You cherry-picked data (a tree) and ignored the forest.

The rest of my comments stand. Please calm down and read them agian. The population goes beyond self-descirbed experts and self-promoted commentators. The ideas are out there and widely accepted.

Now, this may really set you off so let me apologize in advance. You haven't discovered anything new and you are making some serious errors in probabilistic thinking and the associate outcomes. That's the same thing you find fault in others for doing.

Measure, Don't Model: The Forest and the Trees

Fri, 09 Jan 2009 09:43:55 -0500

Don, comments are also best kept brief, so I'll try to do that. Keep in mind, I agree with the major points you’ve made. That said, in my opinion, you’re falling into some of the traps you’ve discussed.

- "12 years ago, the S&P 500 was at 900. Now, it’s at 900. What’s the return over the past 12 years? Zero!" The time period is cherry-picked to make a false assertion about expected returns. Here's a forest: would anyone invest in the stock market if the expected return was zero? There's an undeniable long-term upward trend to the market (roughly 7-8% annually, or .60-.65 monthly). To make the measurements you're making, or at least to make them accurately, it should be included. Measuring accurately may be concerned with the trees, but measuring inaccurately can put one in the wrong forest. It’s especially important when assigning a probability against which a subsequent comparison will be made.

- From the original article: “It (your tool) compares the probability assumed by volatility (which is calculated assuming a normal price distribution) to the actual probability of a certain sized stock movement.” You’re correct, return data doesn’t follow a normal distribution. This is widely accepted. Mandlebrot and Taleb have covered this topic, and its implications, extensively. They’ve also covered your observations about the connectedness of events and market memory. That these concepts are still widely ignored by mainstream commentators and experts is self-evident. You write “That means the index was stagnant far more frequently than predicted.” The other side of that coin is that it also delivers extremely large moves more frequently than predicted. But, both these observations are tautologies given that the predictions (taken from the VIX) are, as already noted, variance-based and wrong. “Actual” probabilities, based on history are no help, particularly for single stocks. The moves in financial issues in 2008 should convince anyone. Betting on stagnation will, at some point, deliver the painful lesson of picking up nickels in front of steamrollers. And, as you note, that’s a very serious mistake to make.

Measure, Don't Model: Probability, VIX and Bad Math

Thu, 08 Jan 2009 11:10:34 -0500

Odds (it's really Don, right?), my comments aren't intended as snarky or to offend either so I hope you don't take them that way. Some of the background info (such as definitions) is intended to get us on some common ground, that's all.

Again, I agree with the thrust of your article. Particularly the shortcomings of the probabilistic reasoning of the cited experts and commentators, and the shortcomings of many models that ultimately are reflected in the VIX.

I'll disagree about the calculations, though. This is not to disagree with the conclusions because, for all I know, the actual returns may fall within the predicted 1SD more than indicated if the expected return is taken into account. I haven't done that analysis. The data set I have handy is Jan 1990 - Dec 2006. The mean for the rolling 30-calendar day return is .75% with a standard deviation of 4.03%. Sticking with the 30-calendar day predicted return range for a VIX of 25 (+-7.17) as an example, the expected return is 10.4% of that predicted range. As I said, I don't know what that means to your facts, figures and conclusions. I would be inclined to take that into account, but I guess we can disagree on that. And, of course, the expected return becomes more pronounced as the time span of the prediction is increased (or as volatilty decreases). Again, using a VIX=25 the prediction for an annual return range would be +-25%. For the 1990-2006 data, the 12-month mean is roughly 10%, so the expected return is 40% of the predicted range. To be fair, the expected return becomes less important as the prediction time span is decreased or as volatility increases.

Measure, Don't Model: Probability, VIX and Bad Math

Wed, 07 Jan 2009 16:52:37 -0500

Odds, thanks for the question. First let me say that I thought there was a lot of goodness in Don's article. I agree with much of what he wrote about the wrong distribution underlying many models, and some of his other points. I was writing about one minor nit that I hear and read often regarding the VIX. Since it is a standard deviation value, it needs a mean to go with it. That part is consistently overlooked. I should've written "this article seems to perpetuate a myth surrounding the VIX. Specifically, that the VIX predicts an expected return or range of returns (around a zero mean)."

My point on Don's article was that, given the appearance that his VIX "predictions" lack a mean return to center around (other than zero), I'm not sure what to make of the 85% figure he cites. But it's a tempest in a teapot, really. Using means and standard deviations to build probability functions for market returns is ill-advised. I'm not implying that is what Don is doing. In fact, he seems to be taking issue with just such an approach.

Now, should we be surprised that actual returns fall within the VIX predicted 1SD range 85% of the time? Not really. This is comparing apples (implied volatility) with oranges (actual or historical volatility). I don't have stats handy, but implied volatility consistently overstates actual volatility because options sellers will err on the side of higher volatility when setting prices. Keep in mind, the VIX is the implied volatility based on actual prices. It's a reverse process following many options sellers (and buyers) putting in (modeling) various implied volatilities across many strike prices. Then there is the supply/demand dynamic when markets are moving quickly. As the prices up and down the options strip(s) expand, the VIX goes up (usually, but not always, as the market goes down). For lack of a better term, the VIX is "unified implied volatility." It's just a measure of price spread in options across various strikes. Predictive? I've spent far too many hours measuring (and modeling) the VIX. At low levels of volatility it's predictive until it isn't (i.e. volatility returns). At high levels it's predictive in that at some point volatility will subside, and markets tend to rise when that happens. I guess there are some strategies that can fall out of that.

I don't know if all that makes any more sense. I hope so.

Measure, Don't Model: Probability, VIX and Bad Math

Wed, 07 Jan 2009 12:47:40 -0500

Good premise. An article that covers a great deal of ground. I'll pick up just one narrow thread, that being calculations using the VIX. Unfortunately, this article seems to perpetuate a myth surrounding the VIX. Specifically, that the VIX predicts an expected return or range of returns. While that may be somewhat true, there's a bit more to it. And that bit more calls into question the calculations and conclusions of the article. Let's leave aside whether the VIX does, in fact, predict anything and deal with what it is supposed to predict.

First, this from the CBOE website: the VIX is a measure of expected volatility calculated as 100 times the square root of the expected 30-day variance (var) of the S&P 500 rate of return. The variance is annualized and VIX expresses volatility in percentage points.

To translate the CBOE definition: the VIX is the expected first standard deviation of the annual S&P 500 rate of return. So, to try to use the VIX for anything, one must first have an "S&P rate of return" for the time period under consideration. That's a big problem since it leads to relying on mean returns, and we know that market returns are lumpy. Since the VIX is already annualized, here's what it tells us if we assume the widely used 8% annual return on the S&P. For a VIX of 25, the expected annual return will be between -17% and +33% at the first standard deviation. At the second standard deviation, it would be between -42% and +58%.

It's easy to calculate the first (or any other) standard deviation of the expected return given any VIX value and time period. The article shows correctly how to do this. For example, at VIX=25 for 30 calendar days, the first standard deviation is 7.17%. But that standard deviation, as well as second, third, etc. deviations, has to be applied to the expected 30-calendar day return. The equation in the article assumes this value to be zero. Perhaps that's ok for very short periods of time (a few days), but at 30-calendar days that is a dangerous assumption. It certainly matters when evaluating the accuracy of 30-calendar day predictions.

All that said, caution is warranted when using means and standard deviations for expected market returns!

Still Blaming the Market Victims

Wed, 07 Jan 2009 10:17:24 -0500

I meant conscience...not conscious. Sorry.